3/13/2007Theseus Professional Services, LLC1 The Net Present Value in Customer Value Analysis Presented 13 March 2007 by Kevin Gilson Theseus Professional

3/13/2007 Theseus Professional Services, LLC 1

The Net Present Value in Customer Value AnalysisThe Net Present Value in Customer Value Analysis

Presented 13 March 2007

by Kevin GilsonTheseus Professional Services, LLC

Presented 13 March 2007

by Kevin GilsonTheseus Professional Services, LLC


What is Customer Value?What is Customer Value?

And market-perceived quality?And market-perceived quality?


Customer ValueCustomer Value

Market-perceived Quality Customer opinion of your products/services compared

to their opinion of your competitors Measured for present customers and potential

customers Identify important product/service attributes Determine how those attributes affect customer choices

Customer Value Market-perceived quality adjusted for the relative price

of your product/service

Market-perceived Quality Customer opinion of your products/services compared

to their opinion of your competitors Measured for present customers and potential

customers Identify important product/service attributes Determine how those attributes affect customer choices

Customer Value Market-perceived quality adjusted for the relative price

of your product/service


Definition of QualityDefinition of Quality The evolution of Quality thinking:

Conformance quality Deming, Crosby, Juran, others Defined in terms of product/service

Customer Satisfaction Often mired in endless surveys and analyses

Market-perceived quality and value versus competitors Basis of the Baldrige Criteria

Customer Value Management Emerging thinking based on customer value analysis

The evolution of Quality thinking: Conformance quality

Deming, Crosby, Juran, others Defined in terms of product/service

Customer Satisfaction Often mired in endless surveys and analyses

Market-perceived quality and value versus competitors Basis of the Baldrige Criteria

Customer Value Management Emerging thinking based on customer value analysis


Quality: a Strategic WeaponQuality: a Strategic Weapon

Four stages of the quality evolution: Total Quality Management (and variants)

Stage 1: Conformance quality Stage 2: Customer satisfaction Stage 3: Market-perceived quality and value relative

to competitors

Customer Value Management Stage 4: Quality and System Thinking are keys to

customer value management

Four stages of the quality evolution: Total Quality Management (and variants)

Stage 1: Conformance quality Stage 2: Customer satisfaction Stage 3: Market-perceived quality and value relative

to competitors

Customer Value Management Stage 4: Quality and System Thinking are keys to

customer value management


Shift in FocusShift in Focus

Total Quality Management Stage 1: Internal operations Stage 2: Customers Stage 3: Market performance vs. competition

Customer Value Management Stage 4: Crucial role of Quality and Value in

the overall strategic framework (systems thinking)

Total Quality Management Stage 1: Internal operations Stage 2: Customers Stage 3: Market performance vs. competition

Customer Value Management Stage 4: Crucial role of Quality and Value in

the overall strategic framework (systems thinking)



Measuring Customer ValueMeasuring Customer Value

Key Customer Metrics Relative Quality Perceived Value

Using this knowledge to drive the business Develop measures of quality and value Add the information to the company knowledge

base Use throughout the organization - across the

silos

Key Customer Metrics Relative Quality Perceived Value

Using this knowledge to drive the business Develop measures of quality and value Add the information to the company knowledge

base Use throughout the organization - across the

silos


Relative QualityRelative Quality What is it?

Quality of product or service is always relative. The question: Relative to what? Relative to:

Customer perception of “quality” Market perception of “quality”

We need to know: Why don’t people buy our product/service? What is our performance relative to our competition

as perceived by our customers?

What is it? Quality of product or service is always relative.

The question: Relative to what? Relative to:

Customer perception of “quality” Market perception of “quality”

We need to know: Why don’t people buy our product/service? What is our performance relative to our competition

as perceived by our customers?


Perceived ValuePerceived Value

What is it? How does the customer perceive the value of

products/services relative to all offerings? Customer perception of “value” Market perception of “value”

We need to know: What does the marketplace feel about all products? What does your customer think about how your

products/services compare to the competition on quality attributes?

What is it? How does the customer perceive the value of

products/services relative to all offerings? Customer perception of “value” Market perception of “value”

We need to know: What does the marketplace feel about all products? What does your customer think about how your

products/services compare to the competition on quality attributes?


Customer ValueCustomer Value

Customers seek products/services that they perceive deliver better value than the competition. Develop “Generally Accepted Strategic

Principles” that define customer value metrics What does “quality” mean to customers? How are competitors performing on those aspects of

quality? How are you performing? Define the performance metrics that are traceable to

the customer definition of “quality”

Customers seek products/services that they perceive deliver better value than the competition. Develop “Generally Accepted Strategic

Principles” that define customer value metrics What does “quality” mean to customers? How are competitors performing on those aspects of

quality? How are you performing? Define the performance metrics that are traceable to

the customer definition of “quality”


Market-perceived Quality ProfileMarket-perceived Quality Profile

Create a profile based on quality attributes: Ask customers and competitor’s customers

what factors influence purchase decisions Establish a customer-based weighting of the

factors as determined by customers Have customers rate each business (Likert scale) on

each factor score x weight = customer satisfaction score

Plot on a Customer Value Map

Create a profile based on quality attributes: Ask customers and competitor’s customers

what factors influence purchase decisions Establish a customer-based weighting of the

factors as determined by customers Have customers rate each business (Likert scale) on

each factor score x weight = customer satisfaction score

Plot on a Customer Value Map


Customer Value MapCustomer Value Map


Customer Value MapCustomer Value Map


Customer LoyaltyCustomer Loyalty

The basics: Understand your customer value proposition Create a value proposition for your employees Provide a value to your investors and other

stakeholders Products/services will keep customers

returning for additional products/services Loyal customers are retained customers (as

long as you continue to deliver value)

The basics: Understand your customer value proposition Create a value proposition for your employees Provide a value to your investors and other

stakeholders Products/services will keep customers

returning for additional products/services Loyal customers are retained customers (as

long as you continue to deliver value)


Loyalty-based Management Model

Loyalty-based Management Model

Customers see their value proposition being fulfilled

Loyalty is a strategy not a tactic Maximize profitability

Decrease hiring costs Decrease employee turnover

Grow the business through customer satisfaction and competitive costs

Customers see their value proposition being fulfilled

Loyalty is a strategy not a tactic Maximize profitability

Decrease hiring costs Decrease employee turnover

Grow the business through customer satisfaction and competitive costs


Today’s MarketplaceToday’s Marketplace

A little Latin lesson: We have moved from caveat emptor

Buyer beware

To caveat mercator Seller beware

People who receive “bad” value seldom return or give your business a second chance

A company must get and retain the right customers

A little Latin lesson: We have moved from caveat emptor

Buyer beware

To caveat mercator Seller beware

People who receive “bad” value seldom return or give your business a second chance

A company must get and retain the right customers


Economics of CustomersEconomics of Customers

Loyal customers provide Base profit to the company Revenue growth through added services

purchased over time Cost savings in recruitment of new customers Referrals of similar businesses to your product

line Price premium - no introductory “deals”

Loyal customers provide Base profit to the company Revenue growth through added services

purchased over time Cost savings in recruitment of new customers Referrals of similar businesses to your product

line Price premium - no introductory “deals”


Customer Lifecycle Profit Pattern (Credit Card Industry)

-100

-50

0

50

100

150

200

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Age of Account (Years)

Annual Profit ($)

Customer Lifecycle Profit Pattern (Credit Card Industry)

-100

-50

0

50

100

150

200

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21


Annual Profit ($)


Cumulative Profit Over Customer Lifetime ($)

-500

0

500

1000

1500

2000

2500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21


Cumulative Profit ($)

Cumulative Profit Over Customer Lifetime ($)

-500

0

500

1000

1500

2000

2500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21


Cumulative Profit ($)


Customer CharacteristicsCustomer Characteristics

The Loyalty Coefficient Some customers prefer long, stable

relationships with suppliers Some customers are more profitable Some customers see your products/services

provide more value than the competition

What are your customer retention rates in each category?

The Loyalty Coefficient Some customers prefer long, stable

relationships with suppliers Some customers are more profitable Some customers see your products/services

provide more value than the competition

What are your customer retention rates in each category?


Customer Loyalty MetricsCustomer Loyalty Metrics

Some measures of the Value of your Customers are: Customer Retention Rate Customer Defection Rate to a competitor’s

product/service Customer Duration with your company Customer Cash Flows Classes of Customer (stratification)

Some measures of the Value of your Customers are: Customer Retention Rate Customer Defection Rate to a competitor’s

product/service Customer Duration with your company Customer Cash Flows Classes of Customer (stratification)


Investing in Your Customer BaseInvesting in Your Customer Base

How do you make the decision to increase one of the Customer metrics? Calculate the Customer-base Net Present Value

Value of Current Customer Inventory: Customer Duration (how long present customers remain

with your company) Lifecycle Profits (value customers contribute as they stay

with your company and purchase products/services) Flow of value from anticipated New Customers:

New-customer Gain Rate (rate at which new customers are added and the quality of those added customers)

How do you make the decision to increase one of the Customer metrics? Calculate the Customer-base Net Present Value

Value of Current Customer Inventory: Customer Duration (how long present customers remain

with your company) Lifecycle Profits (value customers contribute as they stay

with your company and purchase products/services) Flow of value from anticipated New Customers:

New-customer Gain Rate (rate at which new customers are added and the quality of those added customers)


Steps to Customer ValueSteps to Customer Value

1. Stratify the customer base: New customers Gainers (current customers doing more business) Decliners (current customers doing less business) Defectors (current customers leave for competition)

2. Attribute revenue growth to each customer type Calculate NPV for new, current and defector customers

3. Use the information to determine improvements in your customer base or value offering

Which customers will you seek more of? How will you provide value to retain these customers?

1. Stratify the customer base: New customers Gainers (current customers doing more business) Decliners (current customers doing less business) Defectors (current customers leave for competition)

2. Attribute revenue growth to each customer type Calculate NPV for new, current and defector customers

3. Use the information to determine improvements in your customer base or value offering

Which customers will you seek more of? How will you provide value to retain these customers?


7 Tools of Customer Value Analysis

7 Tools of Customer Value Analysis

Bradley Gale, Managing Customer Value Market-perceived quality profile Customer Value Map Market-perceived price profile Won/lost analysis and why Key events timeline

Map actions to improve competitiveness to customer value Head-to-head chart

Shows customer value relative to competition What/who matrix

link quality attributes to business processes

Bradley Gale, Managing Customer Value Market-perceived quality profile Customer Value Map Market-perceived price profile Won/lost analysis and why Key events timeline

Map actions to improve competitiveness to customer value Head-to-head chart

Shows customer value relative to competition What/who matrix

link quality attributes to business processes


Company’s Value PropositionCompany’s Value Proposition

Target Customers to add value Identify the dimensions of quality and service

that will create value for the target customers Create value metrics to track progress How will the value proposition be delivered? Identify the key metrics to monitor relative to

the value of the offering

Target Customers to add value Identify the dimensions of quality and service

that will create value for the target customers Create value metrics to track progress How will the value proposition be delivered? Identify the key metrics to monitor relative to

the value of the offering


ReferencesReferences

Gale, B. T., Managing Customer Value, Creating Quality and Service That Customers Can See, New York, The Free Press, 1994. http://www.galeconsulting.com

Reichheld, F. F., The Loyalty Effect, Boston, Harvard Business School Press, 1996. http://www.bain.com

Naumann, E., & S. Hoisington, Customer Centered Six Sigma, Milwaukee, ASQ Press, 2001.

Capodagli, B., & L. Jackson, The Disney Way, New York, McGraw-Hill, 1999.

Gale, B. T., Managing Customer Value, Creating Quality and Service That Customers Can See, New York, The Free Press, 1994. http://www.galeconsulting.com

Reichheld, F. F., The Loyalty Effect, Boston, Harvard Business School Press, 1996. http://www.bain.com

Naumann, E., & S. Hoisington, Customer Centered Six Sigma, Milwaukee, ASQ Press, 2001.

Capodagli, B., & L. Jackson, The Disney Way, New York, McGraw-Hill, 1999.

Documents

3/13/2007Theseus Professional Services, LLC1 The Net Present Value in Customer Value Analysis Presented 13 March 2007 by Kevin Gilson Theseus Professional